Australian businesses have taken up just $26bn of $150bn in cheap credit offered by the Reserve Bank, in a sign lending could and should play a bigger role in stimulating the economy.
In a speech on Monday the RBA assistant governor, Christopher Kent, explained banks have not taken up the three-year funding facility on behalf of business borrowers because of access to even cheaper private credit, and predicted take-up will improve before the 30 September deadline.
Earlier in July the Morrison government expanded eligibility to its separate loan guarantee after just $1.5bn of loans were issued in the program, which has capacity to guarantee up to $40bn in loans.
On Monday the Australian Prudential Regulation Authority also updated statistics on early release of superannuation, revealing that $28bn has been paid out to 2.9m workers from their retirement savings, including 1m who had made multiple withdrawals.
Kent said the RBA funding facility, first worth $90bn but then expanded to up to $150bn, offered banks a guaranteed source of funding for three years at 0.25% with an incentive to lend to small and medium businesses. Take-up is currently around $26bn, or 17% of the total on offer.
Kent attributed the low take-up to the fact banks “have accessed even cheaper funding” at loan terms shorter than three years, including from bank bills and a rush of deposits at rates below 0.25%.
“Also, the [term-funding facility] provides funding for three years from the date of the drawdown, so the longer an [authorised deposit-taking institution] waits to draw funds, the later they will have to repay the money,” he said.
“With no pressing funding need right now, and ample alternative short-term funding at low cost, delaying the drawdown is a useful option.”
Kent said the RBA expects, based on consultation with banks, the take-up will “ramp up” before 30 September, as banks compare loans at a certain 0.25% against “uncertain cost of other sources of funding”.
Nevertheless, he said the facility had contributed to lending costs falling by 0.6% since February, resulting in fixed mortgage rates falling 0.65% and small to medium business loans down 0.6%.
In March the RBA cut the official cash rate to 0.25% – an emergency low level – and adopted a policy of buying government bonds to stimulate the economy suffering from the Covid-19 recession, the largest since the Great Depression.
Since mid-April liquidity in the system has improved, resulting in an effective cash rate of 0.13% to 0.14%, Kent said.
Kent said since late April the RBA had “significantly” scaled back its purchases of government bonds and has “not needed to purchase any bonds for some time”.
“The general improvement in financial sentiment – aided by the range of other policies, both monetary and fiscal – is … likely to have played a role.”
Kent concluded that Australian authorities had “provided unprecedented support, including via fiscal, monetary and prudential policies … in response to the severe impact of the pandemic on economic activity and financial markets”.
RBA operations had “contributed to a noticeable improvement in market sentiment and accommodative financial conditions” including the availability of a “a wide range of funding, at low rates, including in fixed income markets”.
